Monetary policy instruments for developing countries

In developing countries, the evolution of financial markets and growing disenchantment with directed credit programs and bank-by-bank credit ceilings have increased the interest in examining and moving to indirect methods of implementing monetary policy. The authors provide an overview of the policy issues developing countries face in light of industrial country experience in the last two decades. They discuss the objectives of monetary policy and how these have evolved in recent years, and they describe the different policy instruments that have become available to monetary authorities and how these instruments can be used to cope with the main shocks affecting monetary policy : government deficit financing and those related to external flows. Shifting from direct ways of controlling monetary policy is not universally appealing. Direct controls are simple to operate and seem to offer a sure handle on overall credit or money growth. Moving away from direct controls often involves a fundamental reorientation of central bankers and government officials, not only toward directed credit but toward the financing of government debt. Not every country is in a position to immediately apply the experience gained by industrial countries in operating indirect methods of monetary control. However, more and more monetary authorities can be expected to follow the lead taken especially by several Asian economies.